New rule protects exempt funds from garnishment

A new federal rule[1] will go into effect on May 1, 2011 and will provide stronger protections for consumers with “exempt funds” in their bank accounts in the event their bank account gets garnished. Under current law, when a creditor files suit against an alleged debtor, and obtains a judgment and the right to garnish, restrain or freeze the consumer’s bank account, the consumer must wait until the parties, the bank and the court sort out the question whether funds are exempt from garnishment. All the while, the consumer is without access to her bank account. The new law is designed to end such scenarios by going into effect immediately upon the bank's receipt of a garnishment order.

The second critical change the rule makes is that, unlike under current law, the consumer need not take any affirmative step to assert an exemption. Under the new law, the onus is on the consumer’s bank to ensure that exempt funds deposited within the last two months are protected.

Some important points

The new rule applies to all federally chartered federal and state banks and credit unions.

Funds considered exempt from garnishment are: Social Security, Supplemental Security Income (“SSI”), Veteran’s Administration (“VA”) benefits, federal Railroad Retirement, federal Railroad Unemployment and Sickness benefits, federal Civil Service Retirement benefits and federal Employee Retirement System benefits.

The new rules protect exempt funds even if they are co-mingled in an account with other, non-exempt funds, or held in a joint account.

Funds currently not considered exempt from garnishment are military retirement or other military benefits, but this may change in the future. The new rule also does not protect state benefits.

There is no cap on the amount that can be protected, but the automatic protection of the rule is lost after two months.

In order to get the benefit of the automatic implementation of the new rule (that is, that the consumer need do nothing to protect her exempt funds), the exempt funds must be deposited into the consumer’s account electronically.

-Sheril Stanford


[1] 76 Fed. Reg. 9939 (Feb. 23, 2011) to be codified at 31 C.F.R. §§ 212.1 through 212.12.

Categories: Debt Defense
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